Foreign investors may soon lose various tax exemptions, as the government is studying ways to amend the investment law to possibly eliminate some tax incentives, Prime Minister Hun Sen announced Wednesday.
Hun Sen said the government needs to generate more revenue from the commercial sector while it continues efforts to increase Cambodia’s competitiveness to attract more investment.
“Tax incentives alone will not attract investment unless there is a positive overall environment for investment,” the premier said at the third government-private sector investment forum at the Chaktomuk Conference Hall. The meeting was attended by hundreds of representatives from businesses and international donor organizations.
“The government has already sacrificed considerable revenue in order to attract investment,” he said. “I would like to…appeal to all investors to show understanding of the government’s need for rationalizing incentives and support revenue-enhancing measures.”
Although it is unclear how the amendment would affect Cambodia’s investment climate, private sector officials cautioned that it would further discourage foreign investors from coming here.
“Investors have already stopped coming,” said Roger Tan, secretary-general of the Garment Manufacturers Association in Cambodia. “There will be no more investors when [the government] take tax incentives away.”
Tan said the cost of investing in Cambodia is already high and bureaucratic red tape hinders the investment process.
Hun Sen didn’t go into details of how the government will raise more tax revenue from investors or “rationalize” incentives. But he said that about $170 million could have been generated in revenue if certain businesses did not receive tax breaks. The garment industry accounted for about $163 million of the exemptions, Hun Sen said.
The garment industry is the largest single industry in Cambodia, accounting for about 90 percent of the country’s total exports. Last year, the garment industry exported $950 million worth of goods, mostly to US and European markets.
According to the investment law adopted in 1994, various tax exemptions are given to investors in the fields of high-tech industries, export-oriented investment, tourism and agro-industry. The corporate tax can be exempted for up to eight years, and import duties are not imposed on a host of items and sectors, including: construction materials, equipment, raw materials and spare parts for export-oriented projects, tourism, labor-intensive industry, agro-industry, infrastructure and the energy sector.
In addition to these incentives, the government this year started to repeal the 1 percent minimum tax. That tax is imposed on a company that did not make a profit, so it has to pay the tax equivalent of 1 percent of its revenues, instead of paying the required 9 percent profit tax.
Hun Sen said repealing the 1 percent minimum tax will cause the government to lose about $7 million—equivalent to a 20 percent salary increase for civil servants.
Despite the tax incentives offered by the government, Cambodia has failed to attract foreign investors in recent years.
According to figures from the Council for the Development of Cambodia, pledged private investment declined to $270 million in 2000, a 43 percent drop from the previous year. The figures were the lowest in the last six years, and only one-tenth of the country’s peak investment year of 1995.
Finance Minister Keat Chhon said the government study on amending the investment law would include the value added tax, a 10 percent tax imposed on all services and goods. The VAT has been the country’s largest tax income source since its introduction in 1999, but some industries are exempted from this taxation.
Keat Chhon said in other countries in the region, tax revenues make up around 20 percent of the gross domestic product, but in Cambodia, the revenue from taxation represents only 8 percent of GDP.
“We will review VAT and other tax exemptions,” Keat Chhon said. “With technical assistance from the International Monetary Fund and World Bank, we will conduct a comprehensive study on financial structure.”
The government plans to hold another public forum on the amendment of the investment law with the private sector on March 5.
